Company Perspectives:

We will continue to introduce innovative mortgage products and steadily expand our commercial and personal finance lending activities. We are also giving active consideration to securitisation both as a funding mechanism and to provide additional volume growth. New retail savings products will be introduced both on and off shore, and we will continue to expand our sources of wholesale funding. Whilst margins will undoubtedly remain under pressure, we remain confident that our ability to innovate and our efficiency will result in the Group's continuing prosperity, meeting the aspirations of shareholders and customers.
Key Dates:

Key Dates:

1860:

Northern Counties Permanent Building Society founded.

1865:

Rock Building Society founded.

1965:

Northern Rock Building Society formed from merger of Northern Counties Permanent and Rock.

1960s-80s:Acquisition of 53 building societies.

1991:

Formation of Regency Care Homes Ltd.

1997:

Conversion from building society to public company, Northern Rock Ltd., on London Stock Exchange.

1999:

Listing on London Stock Exchange's FTSE 100 index.

Company History:

Former building society Northern Rock plc is one of the United Kingdom's largest retail banks, and the largest financial institution in its Northeast region home base. Northern Rock ranks in the top 15 of the country's retail banks. In its core product, home mortgage lending, however, Northern Rock ranks near the top, posting as much as ten percent of the total English market for home mortgages. Northern Rock's conversion from private building society to public banking entity took place in October 1997. The company is widely admired for its cost-efficient structure, emphasizing telephone- and postal-based banking over branch office banking. Northern Rock operates an extensive network of 100 branch offices, which primarily serve as sales offices for the company's products. By promoting more cost-efficient banking--including the closing of some 25 branch offices to consolidate its branch office network--Northern Rock is able to offer highly competitive interest and mortgage rates. Among the company's products are mortgage and re-mortgaging packages, including linked home mortgage and personal loan packages, such as the company's offer of mortgages exceeding property values, launched in February 1999. Over half of the company's mortgage sales, however, are in the re-mortgaging bracket, leaving the company vulnerable to price competition from such mortgage industry newcomers as Prudential Egg and Standard Life. The company has parried another vulnerability--hostile takeover--with a built-in 'poison pill': in its conversion to a publicly listed company, Northern Rock established the charitable Northern Rock Foundation, which receives five percent of the company's net profits but, in the event of the takeover, will receive 15 percent of any newly formed entity's shares and voting rights. Northern Rock is listed on the London Stock Exchange; its 1999 assets are said to be enough to make it eligible to join the prestigious FTSE 100, which will in turn make the company more attractive to institutional investors. Northern Rock is led by CEO Leo J. Finn, who is expected to retire soon after the turn of the century after a career spanning more than 40 years at Northern Rock.

Building Society to Bank in the 1960s

When Northern Rock Building Society converted its status from that of mutual-aid organization to publicly listed retail bank, it became one of the last of the United Kingdom's largest building societies to do so. The late 1990s thus all but ended a movement that had been largely responsible for providing homes for the people of the United Kingdom. The building society movement first appeared in the late eighteenth century, but its biggest growth coincided with the growth of the British Industrial Revolution. The changing economic and social landscape of the country&mdash industrialization brought more and more of the population into the United Kingdom's urban and industrial areas--created a demand for new initiatives to house the swelling ranks of a new working class.

The earliest building societies had been formed chiefly by small groups of artisans, who grouped their resources together in order to purchase lands and to build their homes. These societies were known as 'terminating societies.' Once homes had been built for all of a group's members--rarely more than 30 in number--the society was discontinued. By the mid-nineteenth century, however, England's booming industrial society had created vast new urban centers with increasingly large numbers of workers finding employment in the nation's booming factories, shipyards, and mines. The building society concept quickly evolved to embrace this new population. Less affluent than the artisan class, the working class could make up for its lack of wealth in sheer numbers--the 'modern' building society of the mid-nineteenth century had shed the terminating society's role as direct home builder to resemble a bank, keeping the savings of a large pool of members and making housing loans that its members were expected to repay. By the middle of the century, the housing societies had expanded beyond mere lending, becoming secured saving facilities offering interest on its members' savings.

Unlike the terminating societies, this new breed of building society was meant to remain a fixture in British economic and social life. Many building societies, in fact, touted this aspect, adding the designation 'Permanent' to their names. However, not all of these building societies were entirely permanent. By the end of the nineteenth century more than 1,700 building societies were in operation, but by the end of the twentieth century, that number had been pared down to just 80 societies. And in the late 1990s, nearly all of the remaining handful of building societies chose to convert their status to that of publicly listed banking institutions.

Two of the more enduring societies were established in the 1860s. The Northern Counties Permanent Building Society was formed in 1860, and Rock Building Society was formed in 1865. Both building societies served an exclusively northeastern membership. The two building societies prospered in the later decades of the century, especially after legislation enacted in the Building Society Act of 1874 gave the building society a more solid legal footing. The building society provided a number of essential functions for the era. For one, building societies such as Rock and Northern Counties Permanent were able to provide mortgages to an industrial workforce that remained for the most part underpaid and close to poverty. For another, and perhaps most important to the survival of the building society concept into the end of the twentieth century, the building society acted as a cooperative endeavor that fitted well with the beginnings of union movements and the call for democracy in British government. The building society offered a measure of protection to its members as well, particularly during the massive economic fluctuations that marked the end of the nineteenth and beginning of the twentieth centuries. The building society's social commitment proved even stronger than the building society itself: after going public in 1997, Northern Rock not only created the charitable Northern Rock Foundation as a means of continuing to serve the social needs of its northeastern regional base, but also continued a policy of avoiding the repossession of its mortgage-holders' homes for those falling into arrears because of economic problems.

During the twentieth century, the building society movement took on a still more solid position in the British economic landscape, as more and more building societies merged together. By the mid-1960s, the number of building societies had been greatly reduced, in favor of a smaller number of large building societies with the economic clout to compete against the United Kingdom's banks and other lending institutions. In 1965, Northern Counties Permanent Building Society and Rock Building Society joined the movement toward industry consolidation, merging to form the Northern Rock Building Society. While small by national standards, the new Northern Rock took a position as the northeast region's leading financial institution, offering, beyond its concentration on home mortgages, a variety of savings and other traditional banking products.

Banking on the Twenty-First Century

Northern Rock quickly took a leading role in the consolidation of the building society movement. From the early 1970s through the end of the century, Northern Rock acquired the assets and members of some 53 other buildings societies. Several of these largest acquisitions came in the 1990s. The home building market had collapsed in the late 1980s, after a decade of over-building and inflated land pricing. Many building societies found themselves struggling in the early 1990s, as a vast recession settled on the British economy. Northern Rock's tight, cost-efficient management had kept it in relatively robust shape, enabling it to make several key acquisitions at this time. In 1992, the company acquired the assets and membership of Lancastrian Building Society. The following year, Northern Rock added Surrey Building Society to its accounts. The addition of North of England Building Society, acquired in 1994, was one of Northern Rock's largest. The merger gave Northern Rock an additional 400,000 members, as well as a leading six percent of the home mortgage market, propelling Northern Rock into the top ten of the United Kingdom's building societies.

Meanwhile, the so-called 'Big Bang' deregulation of the United Kingdom's banking system, enacted in 1986, had opened new markets to building societies. While Northern Rock remained close to its home mortgage lending core, it soon became a leader in the re-mortgaging market, attracting new members seeking Northern Rock's competitive interest rates. Northern Rock also branched out a bit, adding insurance products with a joint-venture formed in 1996 with Britain's Guardian Royal Exchange to sell its Guardian Insurance products through Northern Rock's branch network. Northern Rock later added life insurance products, through a distribution agreement with Legal & General, in which Northern Rock was to act as an 'introducer' of Legal & General to its society members. Meanwhile, Northern Rock diversified even farther afield, entering the nursing home industry, through its Regency Care Homes Limited subsidiary, which was established in 1990. While that subsidiary remained very small part of Northern Rock's overall business, it nonetheless saw a bit of growth in the middle of the decade, with the 1996 acquisition of Kingsclear Homes Limited. That acquisition, for £40 million, added Kingsclear's 23 nursing homes to Regency's 15 nursing homes, for a total bed count of nearly 2,000. Northern Rock also functioned as the operator of a small number of housing developments, although this activity too remained peripheral to the company's main business.

By the late 1990s, the building society movement seemed to be finally losing steam. More and more of the country's building societies, including the largest of the building societies such as Halifax and the Woolwich, were announcing their intention to convert their status from private society to that of publicly quoted bank. Northern Rock continued to assert its intention to remain as a building society into 1996. However, in April 1996 the building society announced that it too was preparing to go public, following its members' approval in October of that year. Industry analysts suspected that the move was made in part to parry a potential hostile takeover&mdashcording to British law, newly public companies are given a five-year grace period during which they are protected against hostile takeover attempts. Northern Rock encouraged its members' approval by offering one of the industry's largest share packages--500 shares to each member, regardless of the amount of their holdings, which, at the time of the public offering, was worth more than £1,500.

Northern Rock's members approved the conversion in April 1997, and the conversion itself took place in October 1997, as the building society-turned-bank changed its name, to Northern Rock plc. As part of the conversion, Northern Rock set up the Northern Rock Foundation, a charitable organization committed largely to the northeast region's social needs. Under terms of the conversion, Northern Rock Foundation began receiving five percent of Northern Rock's net income; in the event of a takeover of the company, the foundation's legacy was safeguarded with provisions to give it 15 percent of the resulting merged operation's shares and voting rights. Philanthropic considerations aside, many analysts saw this move as a highly creative poison pill defense against the threat of a hostile takeover.

The new Northern Rock quickly garnered industry approval with its tight management, highly competitive products and cost-efficient structure. In order to maintain its leadership in the home mortgage market, a position that the company had managed to raise to more than ten percent by 1998, Northern Rock worked to slash costs. In 1998, the company closed 25 of its branch offices. The company also encouraged its customers to abandon in-person transactions in favor of the company's telephone and ATM services. In this way, Northern Rock expected to be able to continue to offer the industry's most competitive rates, even as it faced new competition, as industry outsiders such as Prudential and Standard Life announced their intention to enter the home mortgage business. Since more than half of Northern Rock's new mortgage business came from the re-mortgaging market--which presumably could be easily attracted away from the company by any more competitive package--Northern Rock took steps to ensure its competitiveness.

Not all of its steps, however, met with customer approval. In 1998, Northern Rock made a major gaffe when it suddenly decided to consolidate its range of savings products from nine separate accounts to just three. Unfortunately, the company only informed its customers on the day of the conversion, and some 400,000 customers suddenly found their savings receiving much lower interest rates than their previous accounts. To compound the problem, Northern Rock maintained a withdrawal penalty if customers wished to transfer their savings to the company's new, higher-interest-bearing accounts. The result was a public relations fiasco--in the face of an Office of Fair Trading investigation, Northern Rock was forced to back down, allowing customers to transfer their savings without penalty, while paying back more than £3 million in lost interest. Many of the company's savings customers defected, withdrawing their savings altogether.

However, by 1999 Northern Rock had managed to restore its reputation. Defending its earlier move as an industry-wide practice, Northern Rock instituted a 'Savers Pledge,' which included, among other provisions, a promise to inform customers of any such changes, and even to inform them of new, higher interest-bearing products as they became available. In this way, Northern Rock was seen as taking a leadership role in the British banking industry's fairness policies. Meanwhile, if Northern Rock had managed to win the displeasure of some of its customers, it remained a favorite of the stock market. By early 1999, the company was eligible for a listing on the prestigious FTSE 100; such a listing would improve the company's image among large institutional investors. Northern Rock also found itself becoming more and more attractive to North American investors, and in 1999 the company was reportedly investigating the possibility of taking a listing on the New York Stock Exchange.